Equity Plunge Yen Connection - (The chart tells the tale says Mish Shedlock)

Mish Shedlock | 5-7-10 | Mish Shedlock

[dennisw]

http://globaleconomicanalysis.blogspot.com/
http://globaleconomicanalysis.blogspot.com/2010/05/equity-plunge-yen-connection.html

45 minutes before US equities went into a waterfall dive, the Yen went into a skyrocket rally vs. the US dollar (inverted on the above chart). The Yen went up 4 cents (Vs the USD) within an hour

The Yen and the stock market magically stabilized at exactly the same time, right at the equity bottom.

What stabilized the market?

The yen dropped versus all 16 major counterparts after the Bank of Japan said it will pump 2 trillion yen ($21.8 billion) into the banking system and the nation’s finance minister said the Group of Seven nations will discuss Greece’s fiscal woes.

“The emergency fund injection from the BOJ helped ease risk aversion, triggering selling of the yen,” said Hiroshi Maeba, deputy general manager of foreign-exchange trading in Tokyo at Nomura Securities Co., Japan’s biggest securities broker. “The action here also spurred speculation that the European Central Bank and the Federal Reserve may follow suit.”

The yen slid as much as 3 percent, the most since Feb. 24, 2009, and traded at 117.79 per euro as of 1:02 p.m. in Tokyo. The yen closed at 114.32 against the euro in New York yesterday after touching 110.70, the strongest since December 2001.

The Bank of Japan’s emergency measure represents its first same-day repurchase operations since December. The balance of current-account deposits held by financial institutions at the central bank will likely increase to 16.9 trillion yen, up 800 billion yen from yesterday, the BOJ said.

Japan’s currency still headed for a 6.1 percent weekly advance versus the euro, its largest gain since the week ended Oct. 24, 2008, as concern Europe’s debt crisis will derail the global recovery damped demand for riskier assets.

 

 

[dennisw]

This has to do with the carry trade I think. Not that I have a great understanding of it a strong USD screws up the current version of the carry trade because it depends on a cheap USD

[agere_contra]

The market is currently at outlandish levels because banks are borrowing dollars to buy stocks. They can do this because the Feds had made enormous funds available to them at ultralow interest, even negative real interest. And - I am given to understand - this dollar-borrowing is insanely leveraged. This is the ‘dollar carry trade’.

So any sustained dollar strength (e.g. from a collapse in the Euro) will crash the market as banks scramble to cover their dollar shorts: a sustained increase in dollar strength will act as a on-off switch, not just a volume control (if that helps).

[vanilla swirl]

I knew the US stock market was propped up (controlled) by the US gubmint. Maybe that’s the way it is in the rest of the world now.
We are Alice in Wonderland and we haven’t reached the bottom of the rabbit hole yet.

[dennisw]

‘dollar carry trade’........

So these banks get really cheap dollars from the Fed and the very act of buying socks with them means you are shorting the USD? This is so in my book only because you are selling newly created US dollars.

Plus the carry trade usually is done in the foreign currency markets

[palmer]

I think you are on the right track (carry trade). But the Yen is also a big time carry trade currency and the sudden rise of the Yen against the Euro would be extremely bad for carry traders. Carry trade funds most of the junk countries like Greece. The carry traders are looking for 1) low rates in Japan/US 2) slow, steady drop in those currencies, and 3) implicit guarantees when they buy bonds from a junk country. #3 has been shaky for a while and guarantee #2 evaporated quickly yesterday.

[dennisw]

Thanks. You are saying what’s really going on yesterday. Mish goes into more detail http://globaleconomicanalysis.blogspot.com/

He doesn’t use the words “carry trade” but it sure seems to me that the BOJ was called upon to dramatically weaken the yen....That when it did, the US markets stabilized. As the yen weakened the US markets went up.

[agere_contra]

I just love the mental image of investment banks solemnly amassing enormous piles of socks using their borrowed dollars :0)

[nkycincinnatikid]

mark

[yield 2 the right]

Wee Wee-ed up stuff for sure.